Latin America is blessed with hydrocarbons but cursed in political risk

Latin America
remains a frontier of opportunity for the upstream, according
to Wood Mackenzies Latin America
upstream team. This region is home to significant hydrocarbon resources. Highlights from a
recemt webcast indicated that aboveground risk levels are
significant hurdles for doing business in this
region.

Foremost, the politics of the Latin America are extremely
volatile and can change overnight. Likewise, contracts with
governments and state-owned oil companies can change without
notice, leaving E&P companies vulnerable to political will
and denial of profits.

Aboveground risks include financing, contracts and
government politics. According to Wood Mackenzie, Latin America
has extremes for doing business. For example, Latin American
countries that have favorable or low-risk business
climates are Columbia, Peru, Chile and Uruguay. On the other
extreme, nations that are considered very high risk countries
for conducting business include Venezuela, Ecuador and
Bolivia.

The remaining nations are in between-- neither
favorable nor too high of risk. Mexico and Brazil fall into
this category.

Another contributor to the risk factor of Latin America is
that national oil companies (NOCs) own the majority of the
commercial reserves and E&P activity. The regional NOCs
(Petrobras, PDVSA, Ecopetrol, and Pemex) dominate reserves and
production. The major international oil companies (IOCs) are
present in Latin America. BP, Statoil, Chevron, Total, Eni,
Shell and ExxonMobil (EM) have some assets in this region.
However, these companies have less than 10% of their worldwide
assets located in Latin America due to the political unrest of
the region and being burned in past business
ventures. In addition, Latin America must compete against other
regions for investment such as Africa and North America.

While the major IOCs are more selective in their business
opportunities, the independents dominate ownership of
exploration acreage. These smaller companies are the ones
taking on the risk and pushing into new frontier areas.

Mexico

President Pena Nieto recently proposed an energy reform that
would
overhaul the sector. If passed, the reform would open the
downstream and midstream segments to foreign investment, as
well as allow private investment in upstream projects through profit-sharing
agreements. The reform must pass through several approval
levels of the nations Congress and Senate before opening
the midstream and downstream to private investment.

Under the new rules, a possible issue is that all of the
produced hydrocarbons must be directed to a government entity
for sale and then the investors would be paid. If all
requirements proceeds without too many problems, it is possible
that licensing of the resources could occur in Q4 of 2014 or
early 2015.

As part of the energy reform discussion, the Mexican
government set aggressive production targets that Mexico, as a
country, should achieve by 2018. Reaching the stated objective
of 3 million bpd will prove difficult, although not impossible
to achieve.

Short-term growth may come from a ramp-up in the Chicontepec
field, the development of heavy oil fields in shallow water and
the use of enhanced oil recovery (EOR) techniques in mature
fields. The Chicontepec field is a more difficult group of
fields to produce. Pemex is producing about 65,000 bpd from
this field; there is an estimated 80 billion bbls of reserves
present. Pemex is having difficulty as the field is a tight oil
reserve and requires horizontal drilling along with
multi-fracture wells. The shallow water unconventional fields
are very heavy oils (8-10oAPI). Special methods are needed to
develop these hydrocarbons.

Over the longer term, production growth will be driven by
deepwater and unconventional developments, which could be
excellent opportunities for IOCs such as Anadarko, BP, Chevron
and EM to apply their know-how and technology.

Shale gas is of interest to Mexico as well. According
to the Energy Information Administration (EIA), Mexico ranks
fourth in shale gas reserves as the Eagle Ford field extends
south across the US border. And Mexico is, in fact,
in need of local natural gas supplies. This nation imports
one-third of its demand for natural gas from the US by pipeline
and some by LNG imports. Demand for natural gas has
required it to purchase LNG on the spot market. Mexico
is also in need of pipeline capacity servicing both
the Pacific and Atlantic coastlines.

Brazil

This nation is fortunate to have great reserves, but it
struggles to execute the management of the major upstream and
downstream projects to capitalize on these
resources. The presalt (Santos basin and Libra fields)
resources are the future. Petrobras will take an additional 10%
stake in Libra, increasing its total interest to 40%.

Given the commitment with this asset, the company which is
already financially strained, is putting itself in a
challenging situation to develop its impressive pipeline of
projects including upstream and downstream projects.

The performance of the Santos Basin relative to other
prominent deepwater basins is a measure of how impressively
Brazil has performed in terms of exploration. However, these
large discoveries present major challenges when it comes to
developing them. Petrobras is attempting to accomplish
something that is never been done in the global deepwater
market before. The company is divesting of its noncore assets
to focus on upstream and downstream projects. Petrobras now dominates
the E&P sector, and Wood Mackenzie expects the company to
operate more than 90% of production into the next decade.

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Good article, but I guess you missed mention Argentina ( South America) as potencial Gas producer with probably 800 TCF in Shale gas Vaca Muerta area. Chevron is starting operation there, among other O&G Companies.

Richard Puig10.30.2013

Good Article. In regards to the Venezuela the article is unfortunately spot on. Unfortunate because they are in a tailspin. With no continuing investment of their own in the "machine" to maintain what they have or to produce and develop more oil they will go into a continued decline. Until someone takes charge and cleans it up, nothing will happen.

angel guilarte10.28.2013

Excellent article. It describes exactly what is the actual political and energy situation in countries like Ecuador and Venezuela. The oil reserves are there, but political unrest makes them very hard to explore and produce anytime soon.

I just see no major changes in the near future in countries like Ecuador, Bolvia and especially in Venezuela.